UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
_________________________________________________
FORM 10-Q
_________________________________________________
(Mark
One)
x |
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2011
OR
o |
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number
001-04471
_________________________________________________
XEROX
CORPORATION
(Exact Name of Registrant as specified in its
charter)
_________________________________________________
New York |
16-0468020 | |
(State or other jurisdiction
of incorporation or organization) |
(IRS
Employer Identification No.) | |
P.O. Box 4505, 45 Glover
Avenue Norwalk, Connecticut |
06856-4505 | |
(Address of principal executive
offices) |
(Zip
Code) | |
(203)
968-3000
(Registrant’s telephone number, including area
code)
_________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past
90 days. Yes x No
o
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes x No
o
Indicate by a check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o
Non-accelerated filer o Smaller reporting company o
Indicate by a check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Class
|
Outstanding at September
30, 2011 | |
Common Stock, $1 par value |
1,387,053,365
shares | |
FORWARD-LOOKING
STATEMENTS
This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should”
and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause
actual results to differ materially. These factors include but are not limited to: changes in economic conditions, political conditions, trade protection measures, licensing requirements, environmental regulations and tax matters in the United
States and in the foreign countries in which we do business; changes in foreign currency exchange rates; the outcome of litigation and regulatory proceedings to which we may be a party; actions of competitors; our ability to expand equipment
placements and to drive the expanded use of color in printing and copying; development of new products and services; interest rates, cost of borrowing and access to credit markets; our ability to protect our intellectual property rights; our ability
to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions; the risk that unexpected costs will be incurred; reliance on third parties for
manufacturing of products and provision of services; the risk that we may not realize all of the anticipated benefits from the acquisition of Affiliated Computer Services, Inc.; our ability to recover capital investments; the risk that
subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term; the risk that
individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security; and other risks that are set forth in the “Risk Factors” section, the
“Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our Quarterly Reports on Form
10-Q for the quarters ended March 31, 2011 and June 30, 2011 and our 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The Company assumes no obligation to update any forward-looking
statements as a result of new information or future events or developments, except as required by
law.
Xerox 2011 Form 10-Q
2
XEROX CORPORATION
FORM
10-Q
September 30, 2011
TABLE OF
CONTENTS
Page
| ||
Item 1. |
||
Item 2. |
||
Item 3. |
||
Item 4. |
||
Item 1. |
||
Item 1A. |
||
Item 2. |
||
Item 6. |
||
For additional information about Xerox Corporation and access to our Annual
Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. Any information on or linked from the website is not incorporated by reference into this Form
10-Q.
Xerox 2011 Form 10-Q
3
PART I — FINANCIAL INFORMATION
ITEM
1 — FINANCIAL STATEMENTS
XEROX CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months
Ended September 30, |
Nine Months
Ended September 30, | |||||||||||||||
(in millions, except
per-share data) |
2011
|
2010 |
2011
|
2010
| ||||||||||||
Revenues
|
||||||||||||||||
Sales |
$ |
1,738 |
$ |
1,700 |
$ |
5,129 |
$ |
5,169 |
||||||||
Service, outsourcing and
rentals |
3,689 |
3,567 |
11,052 |
9,990 |
||||||||||||
Finance income |
156 |
161 |
481 |
498 |
||||||||||||
Total
Revenues |
5,583
|
5,428 |
16,662
|
15,657
|
||||||||||||
Costs and Expenses |
||||||||||||||||
Cost of
sales |
1,154 |
1,127 |
3,383 |
3,381 |
||||||||||||
Cost of service, outsourcing and
rentals |
2,545 |
2,417 |
7,597 |
6,647 |
||||||||||||
Equipment financing
interest |
56 |
61 |
176 |
186 |
||||||||||||
Research, development and engineering
expenses |
183 |
189 |
542 |
588 |
||||||||||||
Selling, administrative and
general expenses |
1,109 |
1,136 |
3,347 |
3,398 |
||||||||||||
Restructuring and asset impairment
charges |
(4 |
) |
4 |
(28 |
) |
210 |
||||||||||
Acquisition-related
costs |
— |
5 |
— |
68 |
||||||||||||
Amortization of intangible assets |
87 |
85 |
259 |
227 |
||||||||||||
Other expenses,
net |
86
|
76
|
268
|
314
|
||||||||||||
Total Costs and
Expenses |
5,216 |
5,100 |
15,544 |
15,019 |
||||||||||||
Income
before Income Taxes and Equity Income |
367 |
328 |
1,118 |
638 |
||||||||||||
Income tax expense |
81 |
98 |
284 |
232 |
||||||||||||
Equity in net income of
unconsolidated affiliates |
43
|
26
|
111
|
52
|
||||||||||||
Net Income |
329 |
256 |
945 |
458 |
||||||||||||
Less: Net income
attributable to noncontrolling interests |
9
|
6
|
25
|
23
|
||||||||||||
Net Income Attributable to
Xerox |
$ |
320 |
$ |
250 |
$ |
920 |
$ |
435 |
||||||||
Basic
Earnings per Share |
$ |
0.23 |
$ |
0.18 |
$ |
0.65 |
$ |
0.32 |
||||||||
Diluted Earnings per
Share |
$ |
0.22 |
$ |
0.17 |
$ |
0.63 |
$ |
0.32 |
||||||||
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
Xerox 2011 Form
10-Q
4
XEROX CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except
share data in thousands) |
September 30,
2011 |
December 31,
2010 | ||||||
Assets
|
||||||||
Cash and cash equivalents |
$ |
785 |
$ |
1,211 |
||||
Accounts receivable,
net |
3,001 |
2,826 |
||||||
Billed portion of finance receivables,
net |
170 |
198 |
||||||
Finance receivables,
net |
2,178 |
2,287 |
||||||
Inventories |
1,209 |
991 |
||||||
Other current
assets |
1,138
|
1,126
|
||||||
Total current assets |
8,481 |
8,639 |
||||||
Finance receivables due
after one year, net |
4,007 |
4,135 |
||||||
Equipment on operating leases, net |
505 |
530 |
||||||
Land, buildings and
equipment, net |
1,645 |
1,671 |
||||||
Investments in affiliates, at
equity |
1,388 |
1,291 |
||||||
Intangible assets,
net |
3,172 |
3,371 |
||||||
Goodwill |
8,786 |
8,649 |
||||||
Deferred tax assets,
long-term |
414 |
540 |
||||||
Other long-term assets |
2,143 |
1,774 |
||||||
Total
Assets |
$
|
30,541 |
$
|
30,600 |
||||
Liabilities and
Equity |
||||||||
Short-term debt and current
portion of long-term debt |
$ |
2,096 |
$ |
1,370 |
||||
Accounts payable |
1,811 |
1,968 |
||||||
Accrued compensation and
benefits costs |
752 |
901 |
||||||
Unearned income |
375 |
371 |
||||||
Other current
liabilities |
1,618
|
1,807
|
||||||
Total current liabilities |
6,652 |
6,417 |
||||||
Long-term
debt |
7,099 |
7,237 |
||||||
Liability to subsidiary trust issuing preferred
securities |
— |
650 |
||||||
Pension and other benefit
liabilities |
1,748 |
2,071 |
||||||
Post-retirement medical benefits |
885 |
920 |
||||||
Other long-term
liabilities |
888
|
797
|
||||||
Total Liabilities |
17,272 |
18,092 |
||||||
Series A
Convertible Preferred Stock |
349
|
349
|
||||||
Common stock |
1,425 |
1,398 |
||||||
Additional paid-in
capital |
6,788 |
6,580 |
||||||
Treasury stock, at cost |
(309 |
) |
— |
|||||
Retained
earnings |
6,736 |
6,016 |
||||||
Accumulated other comprehensive
loss |
(1,886 |
) |
(1,988 |
) | ||||
Xerox shareholders’
equity |
12,754 |
12,006 |
||||||
Noncontrolling interests |
166 |
153 |
||||||
Total
Equity |
12,920
|
12,159
|
||||||
Total Liabilities and
Equity |
$ |
30,541 |
$ |
30,600 |
||||
Shares of common stock
issued |
1,424,765
|
1,397,578
|
||||||
Treasury stock |
(37,712 |
) |
— |
|||||
Shares of common stock
outstanding |
1,387,053
|
1,397,578
|
||||||
The accompanying notes are an integral part of these Condensed
Consolidated Financial
Statements.
Xerox 2011 Form 10-Q
5
XEROX CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months
Ended September 30, |
Nine Months
Ended September 30, | |||||||||||||||
(in
millions) |
2011
|
2010
|
2011
|
2010
| ||||||||||||
Cash Flows
from Operating Activities: |
||||||||||||||||
Net income |
$ |
329 |
$ |
256 |
$ |
945 |
$ |
458 |
||||||||
Adjustments required to
reconcile net income to cash flows from operating activities: |
||||||||||||||||
Depreciation and amortization |
301 |
284 |
890 |
804 |
||||||||||||
Provision for
receivables |
45 |
48 |
99 |
141 |
||||||||||||
Provision for inventory |
13 |
7 |
32 |
24 |
||||||||||||
Net gain on sales of
businesses and assets |
— |
(15 |
) |
(8 |
) |
(16 |
) | |||||||||
Undistributed equity in net income of unconsolidated
affiliates |
(43 |
) |
(26 |
) |
(83 |
) |
(35 |
) | ||||||||
Stock-based
compensation |
29 |
29 |
92 |
86 |
||||||||||||
Restructuring and asset impairment
charges |
(4 |
) |
4 |
(28 |
) |
210 |
||||||||||
Payments for
restructurings |
(42 |
) |
(54 |
) |
(162 |
) |
(148 |
) | ||||||||
Contributions to pension benefit
plans |
(225 |
) |
(142 |
) |
(348 |
) |
(205 |
) | ||||||||
Increase in accounts
receivable and billed portion of finance receivables |
(262 |
) |
(183 |
) |
(548 |
) |
(318 |
) | ||||||||
Collections of deferred proceeds from sales of
receivables |
105 |
73 |
287 |
115 |
||||||||||||
Increase in
inventories |
(141 |
) |
(113 |
) |
(278 |
) |
(311 |
) | ||||||||
Increase in equipment on operating
leases |
(76 |
) |
(72 |
) |
(205 |
) |
(194 |
) | ||||||||
Decrease in finance
receivables |
74 |
69 |
234 |
270 |
||||||||||||
Increase in other current and long-term
assets |
(61 |
) |
(56 |
) |
(184 |
) |
(43 |
) | ||||||||
Increase (decrease) in
accounts payable and accrued compensation |
181 |
134 |
(197 |
) |
321 |
|||||||||||
Increase (decrease) in other current and long-term
liabilities |
78 |
(4 |
) |
(97 |
) |
(70 |
) | |||||||||
Net change in income tax
assets and liabilities |
52 |
76 |
220 |
183 |
||||||||||||
Net change in derivative assets and
liabilities |
19 |
73 |
43 |
69 |
||||||||||||
Other operating,
net |
(6
|
)
|
(22
|
)
|
(21
|
)
|
78
|
|||||||||
Net cash provided by operating
activities |
366 |
366 |
683 |
1,419 |
||||||||||||
Cash Flows
from Investing Activities: |
||||||||||||||||
Cost of additions to land, buildings and
equipment |
(80 |
) |
(100 |
) |
(245 |
) |
(234 |
) | ||||||||
Proceeds from sales of land,
buildings and equipment |
5 |
15 |
9 |
40 |
||||||||||||
Cost of additions to internal use
software |
(41 |
) |
(45 |
) |
(122 |
) |
(114 |
) | ||||||||
Acquisitions, net of cash
acquired |
(51 |
) |
(146 |
) |
(188 |
) |
(1,674 |
) | ||||||||
Net change in escrow and other restricted
investments |
(1 |
) |
13 |
(9 |
) |
19 |
||||||||||
Other investing,
net |
1
|
(3
|
)
|
20
|
1
|
|||||||||||
Net cash used in investing activities |
(167 |
) |
(266 |
) |
(535 |
) |
(1,962 |
) | ||||||||
Cash Flows
from Financing Activities: |
||||||||||||||||
Net (payments) proceeds on debt |
(101 |
) |
(150 |
) |
602 |
(2,188 |
) | |||||||||
Payment of liability to
subsidiary trust issuing preferred securities |
— |
— |
(670 |
) |
— |
|||||||||||
Common stock dividends |
(63 |
) |
(59 |
) |
(182 |
) |
(156 |
) | ||||||||
Preferred stock
dividends |
(6 |
) |
(6 |
) |
(18 |
) |
(9 |
) | ||||||||
Proceeds from issuances of common
stock |
10 |
3 |
41 |
120 |
||||||||||||
Excess tax benefits from
stock-based compensation |
1 |
2 |
5 |
12 |
||||||||||||
Payments to acquire treasury stock, including
fees |
(309 |
) |
— |
(309 |
) |
— |
||||||||||
Repurchases related to
stock-based compensation |
(21 |
) |
(12 |
) |
(27 |
) |
(14 |
) | ||||||||
Other financing |
(3 |
) |
(9 |
) |
(15 |
) |
(18 |
) | ||||||||
Net cash used in financing
activities |
(492
|
)
|
(231
|
)
|
(573
|
)
|
(2,253
|
)
| ||||||||
Effect of exchange rate changes on cash and cash
equivalents |
(20 |
) |
24 |
(1 |
) |
(28 |
) | |||||||||
Decrease in cash and cash
equivalents |
(313 |
) |
(107 |
) |
(426 |
) |
(2,824 |
) | ||||||||
Cash and cash equivalents at beginning of
period |
1,098 |
1,082 |
1,211 |
3,799 |
||||||||||||
Cash and Cash
Equivalents at End of Period |
$
|
785 |
$
|
975 |
$
|
785 |
$
|
975 |
||||||||
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
Xerox 2011 Form
10-Q
6
XEROX CORPORATION
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions, except per-share data and where otherwise
noted)
Note 1 – Basis of
Presentation
References herein to “we,” “us,” “our,” the
“Company” and “Xerox” refer to Xerox Corporation and its consolidated subsidiaries unless the context specifically requires
otherwise.
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in
accordance with the accounting policies described in our 2010 Annual Report to Shareholders, which is incorporated by reference in our 2010 Annual Report on Form 10-K (“2010 Annual Report”), and the interim reporting requirements of Form
10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You
should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in our 2010 Annual
Report.
In our opinion, all adjustments which are necessary for a fair statement of financial position,
operating results and cash flows for the interim periods presented have been made. Interim results of operations are not necessarily indicative of the results of the full
year.
For convenience and ease of reference, we refer to the financial statement caption “Income
before Income Taxes and Equity Income” as “pre-tax income.”
Note 2 – Recent Accounting
Pronouncements
Testing Goodwill
for Impairment: In September 2011, the FASB issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350) -
Testing Goodwill for Impairment, which allows an entity to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test.
Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for our fiscal year beginning January 1, 2012 and earlier adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2011-08 on our
Consolidated financial
statements.
Presentation of
Comprehensive Income: In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive
Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The items that must be reported in other comprehensive income or when an item of other
comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. ASU 2011-05 is effective for our fiscal year beginning January 1, 2012 and
must be applied retrospectively. We expect to present comprehensive income in two separate but consecutive statements and we most likely expect to early adopt commencing with our 2011 year-end reporting. Other than the change in presentation, we
have determined these changes will not have an impact on our Consolidated Financial Statements.
Fair Value Measurement and Disclosure Requirements: In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820) – Fair
Value Measurement, to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain
fair value measurement principles and enhances the disclosure requirements, particularly for level 3 fair value measurements. ASU 2011-04 is effective for our fiscal year beginning January 1, 2012 and must be applied prospectively. We are
currently evaluating the impact of the adoption of ASU 2011-04 on our Consolidated financial statements.
Receivables: In
April 2011, the FASB issued ASU 2011-02 to provide additional guidance on a creditor’s determination of whether a restructuring is a troubled debt restructuring. The additional guidance was provided to assist a creditor in determining whether
it has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining if a restructuring constitutes a troubled debt restructuring. The update was effective for
our
Xerox 2011 Form
10-Q
7
third quarter beginning July 1, 2011 and did not have a material effect on our financial condition, results of operations or disclosures as renegotiations and modifications of our finance
receivables occur on a limited
basis.
Note 3 – Segment
Reporting
Our reportable segments are aligned with how we manage the business and view the markets we
serve. We report our financial performance based on the following two primary reportable segments
– Technology and Services. Our Technology segment includes the sale and support of a broad range of document systems from entry level to high-end. Our Services segment operations involve delivery of a broad range of outsourcing services
including document, business processing and IT outsourcing services.
Our Technology segment is centered on strategic product groups, which share common technology, manufacturing and product platforms. This
segment includes the sale of document systems and supplies, technical services and product financing. Our products range
from:
• |
“Entry,” which includes A4 devices and
desktop printers; to |
• |
“Mid-range,” which includes A3 devices
that generally serve workgroup environments in mid to large enterprises and includes products that fall into the following market categories: Color 41+ ppm priced at less than $100K and Light Production 91+ ppm priced at less than $100K;
to |
• |
“High-end,” which includes production
printing and publishing systems that generally serve the graphic communications marketplace and large enterprises. |
The Services segment is comprised of three outsourcing service offerings:
• |
Document Outsourcing (which includes Managed Print Services) |
• |
Business Process Outsourcing |
• |
Information Technology
Outsourcing |
Document outsourcing services include service arrangements that allow
customers to streamline, simplify and digitize their document-intensive business processes through automation and deployment of software application and tools and the management of their printing needs. Document outsourcing also includes revenues
from our partner print services offerings. Business process outsourcing services includes service arrangements where we manage a customer’s business activity or process. Information technology outsourcing services include service arrangements
where we manage a customer’s IT-related activities, such as application management and application development, data center operations or testing and quality
assurance.
The segment classified as
Other includes several units, none of which meet the thresholds for separate segment reporting. This group primarily
includes Xerox Supplies Business Group (predominantly paper sales), Wide Format Systems, licensing revenues, GIS network integration solutions and electronic presentation systems and non-allocated Corporate items including non-financing interest, as
well as other items included in Other expenses, net.
Operating segment revenues and profitability were as
follows:
Three Months
Ended September 30, |
Nine Months
Ended September 30, | ||||||||||||||
Segment Revenue
|
Segment Profit (Loss)
|
Segment Revenue
|
Segment Profit (Loss)
| ||||||||||||
2011 |
|||||||||||||||
Technology |
$ |
2,500 |
$ |
258 |
$ |
7,547 |
$ |
824 |
|||||||
Services |
2,717 |
323 |
7,973 |
911 |
|||||||||||
Other |
366 |
(86 |
) |
1,142 |
(225 |
) | |||||||||
Total
|
$
|
5,583 |
$
|
495 |
$
|
16,662 |
$
|
1,510 |
|||||||
2010
|
|||||||||||||||
Technology |
$ |
2,466 |
$ |
247 |
$ |
7,504 |
$ |
753 |
|||||||
Services |
2,554 |
286 |
6,926 |
808 |
|||||||||||
Other |
408
|
(79
|
)
|
1,227
|
(276
|
)
| |||||||||
Total |
$ |
5,428 |
$ |
454 |
$ |
15,657 |
$ |
1,285 |
|||||||
Xerox 2011 Form
10-Q
8
Three Months
Ended September 30, |
Nine Months
Ended September 30, | |||||||||||||||
Reconciliation
to Pre-tax Income |
2011 |
2010 |
2011 |
2010 | ||||||||||||
Segment
Profit |
$ |
495 |
$ |
454 |
$ |
1,510 |
$ |
1,285 |
||||||||
Reconciling items: |
||||||||||||||||
Restructuring and asset
impairment charges |
4 |
(4 |
) |
28 |
(210 |
) | ||||||||||
Restructuring charges of Fuji Xerox |
(1 |
) |
(6 |
) |
(16 |
) |
(33 |
) | ||||||||
Acquisition-related
costs |
— |
(5 |
) |
— |
(68 |
) | ||||||||||
Amortization of intangible assets |
(87 |
) |
(85 |
) |
(259 |
) |
(227 |
) | ||||||||
Venezuelan devaluation
costs |
— |
— |
— |
(21 |
) | |||||||||||
ACS shareholders litigation
settlement |
— |
— |
— |
(36 |
) | |||||||||||
Loss on early extinguishment
of liability |
— |
— |
(33 |
) |
— |
|||||||||||
Equity in net income of unconsolidated
affiliates |
(43 |
) |
(26 |
) |
(111 |
) |
(52 |
) | ||||||||
Other |
(1
|
)
|
—
|
(1
|
)
|
—
|
||||||||||
Pre-tax Income |
$ |
367 |
$ |
328 |
$ |
1,118 |
$ |
638 |
||||||||
Note 4
– Acquisitions
In February 2011, we acquired
Concept Group, Ltd. for $43 net of cash acquired. This acquisition expands our reach into the small and mid-size business market in the U.K.
Concept Group has nine locations throughout the U.K. and provides document imaging solutions and
technical services to more than 3,000
customers.
In April 2011, we
acquired Unamic/HCN B.V., the largest privately-owned customer care provider in the Benelux region, for
approximately $55 net of cash acquired. Unamic/HCN’s focus on
the Dutch-speaking market expands our customer care capabilities in the Netherlands, Belgium, Turkey and
Suriname.
In May 2011, we
acquired NewField Information Technology, Ltd., a U.K.-based print consultancy and software solution
provider, for $17 net of cash acquired. The acquisition expands our market-leading managed print
services portfolio that serves workplaces of any size.
In July 2011, we acquired Education Sales and Marketing, LLC
("ESM"), a leading provider of outsourced enrollment management and student loan default solutions, for approximately $43 net of cash acquired. The acquisition of ESM enables us to offer a broader range of services to assist post-secondary schools in attracting and retaining the most qualified students while reducing
accreditation risk.
In
September 2011, we acquired the net assets related to the U.S. operations of Symcor Inc. ("Symcor"). In
connection with the acquisition of the net assets, we assumed and took over the operational responsibility for the customer contracts related to this operation. We agreed to pay $17 for the acquired net assets and the Seller agreed to pay us $52, which represented the fair value of the liabilities assumed. The payments were made in October 2011 and we
received net cash of $35. Symcor specializes in outsourcing services for U.S. financial institutions and
its offerings range from cash management services to statement and check processing. We are in the process of determining the purchase price allocation for this
acquisition.
We acquired seven additional businesses in 2011 for a total of $21 in cash as part of our strategy of increasing our U.S. distribution network for small and mid-size businesses.
These acquisitions further our strategy of creating a nationwide network of office technology suppliers focused on improving document workflow and office efficiency for small and mid-size
businesses.
Summary
The operating results of the acquisitions described above are not material to our financial statements and are included within our results from the respective acquisition dates. Unamic/HCN, NewField
IT, ESM and Symcor are included within our Services segment while the acquisitions of office technology suppliers are included within our Technology segment. The purchase prices, for all acquisitions except Symcor, were primarily allocated to
intangible assets and goodwill based on third-party valuations and management’s
estimates.
ACS
Acquisition
In February 2010, we acquired ACS in a cash-and-stock transaction valued at approximately $6.5 billion. In addition, we repaid $1.7 billion of ACS’s debt at acquisition and assumed an additional $0.6 billion of debt. ACS provides business
Xerox 2011 Form
10-Q
9
process outsourcing and information technology outsourcing services and solutions to commercial and governmental clients worldwide. The operating results of ACS are included in our Services segment
from February 6, 2010.
The unaudited pro-forma results presented below include the effects of the ACS
acquisition as if it had been consummated as of January 1, 2010. The pro-forma results include the amortization associated with the acquired intangible assets and interest expense associated with debt used to fund the acquisition, as well as
fair value adjustments for unearned revenue, software and land, buildings and equipment. To better reflect the combined operating results, material non-recurring charges directly attributable to the transaction have been excluded. In addition, the
pro-forma results do not include any synergies or other benefits of the acquisition. Accordingly, the unaudited pro-forma financial information below is not necessarily indicative of either future results of operations or results that might have
been achieved had the acquisition been consummated as of January 1,
2010.
Nine Months
Ended September 30, 2010 | |||||||
Pro-forma
|
As
Reported | ||||||
Revenue |
$ |
16,276 |
$ |
15,657 |
|||
Net income – Xerox |
421 |
435 |
|||||
Basic earnings
per-share |
0.29 |
0.32 |
|||||
Diluted earnings per-share |
0.29 |
0.32 |
|||||
Note 5 –
Receivables, Net
Accounts Receivable Sales
Arrangements
We have facilities in the U.S., Canada and several countries in Europe that enable us to sell
to third-parties, on an on-going basis, certain accounts receivable without recourse. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days. The agreements involve the sale of entire
groups of accounts receivable for cash. In certain instances a portion of the sales proceeds are held back and deferred until collection of the related receivables by the purchaser. Such holdbacks are not considered legal securities nor are they
certificated. We report collections on such receivables as operating cash flows in the Condensed Consolidated Statements of Cash Flows, because such receivables are the result of an operating activity and the associated interest rate risk is de
minimis due to its short-term nature. These receivables are included in the caption “Other current assets” in the accompanying Condensed Consolidated Balance Sheets and were $93 and $90 at September 30, 2011 and December 31, 2010, respectively. Under most of the agreements, we continue to service the sold accounts
receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material. Accounts receivables sales were as
follows:
Three Months Ended September
30, |
Nine Months Ended September
30, | ||||||||||||||
2011
|
2010
|
2011
|
2010
| ||||||||||||
Accounts receivable
sales |
$ |
754 |
$ |
574 |
$ |
2,303 |
$ |
1,586 |
|||||||
Deferred proceeds |
93 |
97 |
290 |
212 |
|||||||||||
Fees associated with
sales |
5 |
3 |
14 |
10 |
|||||||||||
Estimated decrease to
operating cash flows(1) |
(35 |
) |
(11 |
) |
(29 |
) |
(81 |
) | |||||||
_____________________________
(1) |
Represents the difference between current and prior period receivable sales adjusted for the effects of:
(i) the deferred proceeds, (ii) collections prior to the end of the quarter and (iii) currency. |
Finance Receivables – Allowance for Credit Losses and Credit Quality
Finance receivables include sales-type leases, direct financing leases and installment loans. Our finance receivable portfolios are primarily in the U.S., Canada and Europe. We generally establish customer
credit limits and estimate the allowance for credit losses on a country or geographic basis. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods
presented.
The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in
finance receivables:
Xerox 2011 Form 10-Q
10
United States |
Canada |
Europe |
Other
(3) |
Total | |||||||||||||||
Allowance for Credit Losses: |
|||||||||||||||||||
Balance at December 31, 2010 |
$ |
91 |
$ |
37 |
$ |
81 |
$ |
3 |
$ |
212 |
|||||||||
Provision |
7 |
4 |
11 |
— |
22 |
||||||||||||||
Charge-offs |
(10 |
) |
(5 |
) |
(8 |
) |
— |
(23 |
) | ||||||||||
Recoveries
and other(1) |
(1
|
)
|
2
|
3
|
—
|
4
|
|||||||||||||
Balance at March 31,
2011 |
87 |
38 |
87 |
3 |
215 |
||||||||||||||
Provision |
1 |
3 |
14 |
— |
18 |
||||||||||||||
Charge-offs |
(6 |
) |
(5 |
) |
(11 |
) |
— |
(22 |
) | ||||||||||
Recoveries
and other(1) |
(1 |
) |
— |
(1 |
) |
— |
(2 |
) | |||||||||||
Balance at June 30,
2011 |
81 |
36 |
89 |
3 |
209 |
||||||||||||||
Provision |
4 |
1 |
18 |
— |
23 |
||||||||||||||
Charge-offs |
(7 |
) |
(3 |
) |
(19 |
) |
— |
(29 |
) | ||||||||||
Recoveries and other(1) |
1 |
(1 |
) |
(5 |
) |
— |
(5 |
) | |||||||||||
Balance September 30,
2011 |
$
|
79 |
$
|
33 |
$
|
83 |
$
|
3 |
$
|
198 |
|||||||||
Finance
receivables as of September 30, 2011 collectively evaluated for impairment(2) |
$ |
2,943 |
$ |
793 |
$ |
2,714 |
$ |
95 |
$ |
6,545 |
|||||||||
Allowance for Credit Losses: |
|||||||||||||||||||
Balance at December 31, 2009 |
$ |
99 |
$ |
33 |
$ |
87 |
$ |
3 |
$ |
222 |
|||||||||
Provision |
10 |
6 |
17 |
— |
33 |
||||||||||||||
Charge-offs |
(22 |
) |
(6 |
) |
(11 |
) |
— |
(39 |
) | ||||||||||
Recoveries
and other(1) |
1
|
2
|
(5
|
)
|
—
|
(2
|
)
| ||||||||||||
Balance at March 31,
2010 |
88 |
35 |
88 |
3 |
214 |
||||||||||||||
Provision |
15 |
6 |
12 |
— |
33 |
||||||||||||||
Charge-offs |
(17 |
) |
(8 |
) |
(19 |
) |
— |
(44 |
) | ||||||||||
Recoveries
and other(1) |
— |
— |
(6 |
) |
— |
(6 |
) | ||||||||||||
Balance at June 30,
2010 |
86 |
33 |
75 |
3 |
197 |
||||||||||||||
Provision |
13 |
5 |
17 |
— |
35 |
||||||||||||||
Charge-offs |
(9 |
) |
(5 |
) |
(10 |
) |
— |
(24 |
) | ||||||||||
Recoveries
and other(1) |
2 |
2 |
7 |
— |
11 |
||||||||||||||
Balance at September 30,
2010 |
$
|
92 |
$
|
35 |
$
|
89 |
$
|
3 |
$
|
219 |
|||||||||
Finance
receivables as of September 30, 2010 collectively evaluated for impairment(2) |
$ |
3,184 |
$ |
826 |
$ |
2,700 |
$ |
58 |
$ |
6,768 |
|||||||||
_____________________________
(1) |
Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect
events of non-payment such as customer accommodations and contract terminations. |
(2) |
Total Finance receivables exclude residual values of $8 and $13, and the allowance for credit losses of $198 and $219 at September 30, 2011 and 2010, respectively. |
(3) |
Includes developing market countries and smaller
units. |
We evaluate our customers based on the following credit quality
indicators:
• |
Investment grade: This rating
includes accounts with excellent to good business credit, asset quality and the capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The
rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally minimal at less than
1%. |
• |
Non-investment grade: This
rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated
with this customer class, we believe the risk is somewhat mitigated by |
Xerox 2011 Form 10-Q
11
the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain with such
leases. Loss rates in this category are generally in the range of 2% to 4%.
• |
Substandard: This rating
includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments,
personal guarantees and etc. Accounts in this category include customers who were downgraded during the term of the lease from investment and non-investment grade evaluation when the lease was originated. Accordingly there is a distinct possibility
for a loss of principal and interest or customer default. The loss rates in this category are around
10%. |
Credit quality indicators are updated at least annually and the credit
quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:
September 30,
2011 | |||||||||||||||
Investment
Grade |
Non-investment
Grade |
Substandard
|
Total Finance
Receivables | ||||||||||||
Finance and Other
Services |
$ |
322 |
$ |
394 |
$ |
162 |
$ |
878 |
|||||||
Government and Education |
806 |
23 |
5 |
834 |
|||||||||||
Graphic
Arts |
119 |
203 |
154 |
476 |
|||||||||||
Industrial |
187 |
82 |
34 |
303 |
|||||||||||
Healthcare |
125 |
43 |
27 |
195 |
|||||||||||
Other |
90 |
104 |
63 |
257 |
|||||||||||
Total United
States |
1,649
|
849
|
445
|
2,943
|
|||||||||||
Finance and Other Services |
142 |
114 |
50 |
306 |
|||||||||||
Government and
Education |
119 |
9 |
4 |
132 |
|||||||||||
Graphic Arts |
35 |
38 |
35 |
108 |
|||||||||||
Industrial |
54 |
40 |
32 |
126 |
|||||||||||
Other |
72 |
39 |
10 |
121 |
|||||||||||
Total
Canada |
422
|
240
|
131
|
793
|
|||||||||||
France |
244 |
372 |
86 |
702 |
|||||||||||
U.K./Ireland |
193 |
170 |
56 |
419 |
|||||||||||
Central(1) |
340 |
508 |
60 |
908 |
|||||||||||
Southern
(2) |
242 |
291 |
48 |
581 |
|||||||||||
Nordics(3) |
62 |
38 |
4 |
104 |
|||||||||||
Total
Europe |
1,081
|
1,379
|
254
|
2,714
|
|||||||||||
Other |
66 |
23 |
6 |
95 |
|||||||||||
Total
|
$
|
3,218 |
$
|
2,491 |
$
|
836 |
$
|
6,545 |
|||||||
December 31,
2010 | |||||||||||||||
Investment
Grade |
Non-investment
Grade |
Substandard
|
Total Finance
Receivables | ||||||||||||
Finance and Other
Services |
$ |
360 |
$ |
401 |
$ |
190 |
$ |
951 |
|||||||
Government and Education |
849 |
21 |
7 |
877 |
|||||||||||
Graphic
Arts |
147 |
217 |
156 |
520 |
|||||||||||
Industrial |
206 |
91 |
38 |
335 |
|||||||||||
Healthcare |
134 |
48 |
32 |
214 |
|||||||||||
Other |
102 |
109 |
69 |
280 |
|||||||||||
Total United
States |
1,798
|
887
|
492
|
3,177
|
|||||||||||
Finance and Other Services |
150 |
127 |
56 |
333 |
|||||||||||
Xerox 2011 Form 10-Q
12
Government and
Education |
127 |
12 |
3 |
142 |
|||||||||||
Graphic Arts |
32 |
35 |
48 |
115 |
|||||||||||
Industrial |
57 |
47 |
30 |
134 |
|||||||||||
Other |
88 |
47 |
13 |
148 |
|||||||||||
Total
Canada |
454
|
268
|
150
|
872
|
|||||||||||
France |
219 |
374 |
82 |
675 |
|||||||||||
U.K./Ireland |
206 |
164 |
51 |
421 |
|||||||||||
Central(1) |
297 |
551 |
65 |
913 |
|||||||||||
Southern
(2) |
263 |
237 |
81 |
581 |
|||||||||||
Nordics(3) |
50 |
63 |
3 |
116 |
|||||||||||
Total
Europe |
1,035
|
1,389
|
282
|
2,706
|
|||||||||||
Other |
33 |
33 |
— |
66 |
|||||||||||
Total
|
$
|
3,320 |
$
|
2,577 |
$
|
924 |
$
|
6,821 |
|||||||
_____________________________
(1) |
Switzerland, Germany, Austria, Belgium and Holland. |
(2) |
Italy, Greece, Spain and Portugal. |
(3) |
Sweden, Norway, Denmark and
Finland. |
The
aging of our billed finance receivables is based upon the number of days an invoice is past due and is as
follows:
Xerox 2011 Form 10-Q
13
September 30,
2011 | |||||||||||||||||||||||||||
Current
|
31-90
Days Past Due |
>90 Days
Past Due |
Total
Billed Finance Receivables |
Unbilled
Finance Receivables |
Total
Finance Receivables |
Finance
Receivables >90
Days and Accruing | |||||||||||||||||||||
Finance and Other
Services |
$ |
19 |
$ |
4 |
$ |
1 |
$ |
24 |
$ |
854 |
$ |
878 |
$ |
21 |
|||||||||||||
Government and Education |
22 |
4 |
3 |
29 |
805 |
834 |
35 |
||||||||||||||||||||
Graphic
Arts |
17 |
2 |
1 |
20 |
456 |
476 |
12 |
||||||||||||||||||||
Industrial |
8 |
2 |
1 |
11 |
292 |
303 |
10 |
||||||||||||||||||||
Healthcare |
5 |
2 |
1 |
8 |
187 |
195 |
6 |
||||||||||||||||||||
Other |
7 |
1 |
1 |
9 |
248 |
257 |
12 |
||||||||||||||||||||
Total United
States |
78
|
15
|
8
|
101
|
2,842
|
2,943
|
96
|
||||||||||||||||||||
Canada |
3 |
3 |
1 |
7 |
786 |
793 |
27 |
||||||||||||||||||||
France |
2 |
— |
1 |
3 |
699 |
702 |
18 |
||||||||||||||||||||
U.K./Ireland |
3 |
2 |
3 |
8 |
411 |
419 |
14 |
||||||||||||||||||||
Central
(1) |
7 |
3 |
4 |
14 |
894 |
908 |
45 |
||||||||||||||||||||
Southern(2) |
17 |
12 |
18 |
47 |
534 |
581 |
115 |
||||||||||||||||||||
Nordics
(3) |
1
|
—
|
—
|
1
|
103
|
104
|
—
|
||||||||||||||||||||
Total Europe |
30 |
17 |
26 |
73 |
2,641 |
2,714 |
192 |
||||||||||||||||||||
Other
|
1
|
1
|
—
|
2
|
93
|
95 |
—
|
||||||||||||||||||||
Total |
$ |
112 |
$ |
36 |
$ |
35 |
$ |
183 |
$ |
6,362 |
$ |
6,545 |
$ |
315 |
|||||||||||||
December 31,
2010 | |||||||||||||||||||||||||||
Current
|
31-90
Days Past Due |
>90
Days Past Due |
Total
Billed Finance Receivables |
Unbilled
Finance Receivables |
Total
Finance Receivables |
Finance
Receivables >90
Days and Accruing | |||||||||||||||||||||
Finance and Other
Services |
$ |
23 |
$ |
5 |
$ |
2 |
$ |
30 |
$ |
921 |
$ |
951 |
$ |
23 |
|||||||||||||
Government and Education |
26 |
6 |
3 |
35 |
842 |
877 |
40 |
||||||||||||||||||||
Graphic
Arts |
21 |
3 |
1 |
25 |
495 |
520 |
16 |
||||||||||||||||||||
Industrial |
11 |
2 |
1 |
14 |
321 |
335 |
10 |
||||||||||||||||||||
Healthcare |
6 |
2 |
1 |
9 |
205 |
214 |
9 |
||||||||||||||||||||
Other |
8 |
2 |
— |
10 |
270 |
280 |
8 |
||||||||||||||||||||
Total United
States |
95
|
20
|
8
|
123
|
3,054
|
3,177
|
106
|
||||||||||||||||||||
Canada |
3 |
3 |
1 |
7 |
865 |
872 |
28 |
||||||||||||||||||||
France |
1 |
1 |
— |
2 |
673
|
675 |
5 |
||||||||||||||||||||
U.K./Ireland |
4 |
1 |
1 |
6 |
415 |
421 |
7 |
||||||||||||||||||||
Central
(1) |
9 |
2 |
4 |
15 |
898 |
913 |
39 |
||||||||||||||||||||
Southern(2) |
32 |
10 |
15 |
57 |
524 |
581 |
99 |
||||||||||||||||||||
Nordics
(3) |
1
|
—
|
—
|
1
|
115
|
116
|
2
|
||||||||||||||||||||
Total Europe |
47 |
14 |
20 |
81 |
2,625 |
2,706 |
152 |
||||||||||||||||||||
Other
|
2
|
—
|
—
|
2
|
64 |
66
|
—
|
||||||||||||||||||||
Total |
$ |
147 |
$ |
37 |
$ |
29 |
$ |
213 |
$ |
6,608 |
$ |
6,821 |
$ |
286 |
|||||||||||||
_____________________________
(1) |
Switzerland, Germany, Austria, Belgium and Holland. |
(2) |
Italy, Greece, Spain and Portugal. |
(3) |
Sweden, Norway, Denmark and
Finland. |
Note 6 – Inventories
The following is a summary
of Inventories by major category:
Xerox 2011 Form
10-Q
14
September 30,
2011 |
December 31,
2010 | ||||||
Finished
goods |
$ |
1,030 |
$ |
858 |
|||
Work-in-process |
74 |
46 |
|||||
Raw
materials |
105
|
87
|
|||||
Total Inventories |
$ |
1,209 |
$ |
991 |
|||
Note 7
– Investment in Affiliates, at Equity
Our equity in net income of our unconsolidated affiliates was as
follows:
Three Months
Ended September 30, |
Nine Months
Ended September 30, | ||||||||||||||
2011
|
2010
|
2011
|
2010
| ||||||||||||
Fuji Xerox |
$ |
42 |
$ |
23 |
$ |
104 |
$ |
41 |
|||||||
Other investments |
1 |
3 |
7 |
11 |
|||||||||||
Total Equity
in Net Income of Unconsolidated Affiliates |
$ |
43
|
$ |
26
|
$ |
111
|
$ |
52
|
|||||||
Fuji Xerox
Equity in net income of Fuji Xerox is affected by certain adjustments to reflect the deferral of profit associated with intercompany sales. These adjustments may result in recorded equity income that is
different from that implied by our 25% ownership interest. Equity income for the nine months ended
September 30, 2011 and 2010 includes after-tax restructuring charges of $16 and $33, respectively, primarily reflecting Fuji Xerox’s continued cost-reduction initiatives.
Condensed financial data of Fuji Xerox was as
follows:
Three Months
Ended September 30, |
Nine Months
Ended September 30, | ||||||||||||||
2011
|
2010
|
2011
|
2010
| ||||||||||||
Summary of
Operations: |
|||||||||||||||
Revenues |
$ |
3,330 |
$ |
2,860 |
$ |
9,274 |
$ |
8,326 |
|||||||
Costs and
expenses |
3,042
|
2,655
|
8,584
|
7,894
|
|||||||||||
Income before income taxes |
288 |
205 |
690 |
432 |
|||||||||||
Income tax
expense |
107
|
97
|
231
|
204
|
|||||||||||
Net Income |
181 |
108 |
459 |
228 |
|||||||||||
Less: Net income –
noncontrolling interests |
1
|
1
|
3
|
3
|
|||||||||||
Net Income – Fuji
Xerox |
$ |
180 |
$ |
107 |
$ |
456 |
$ |
225 |
|||||||
Weighted
Average Rate(1) |
77.69
|
85.79
|
80.37
|
89.43
|
|||||||||||
_____________________________
(1) |
Represents Yen/U.S. Dollar exchange rate used to
translate. |
Note 8 – Restructuring Programs
Information related to restructuring program activity during the nine months ended September 30, 2011 is outlined
below:
Xerox 2011 Form 10-Q
15
Severance and
Related Costs |
Lease Cancellation
and Other Costs |
Total | |||||||||
Balance December 31,
2010 |
$ |
298
|
$ |
25
|
$
|
323 |
|||||
Restructuring provision |
32 |
1 |
33 |
||||||||
Reversals of prior
accruals |
(55
|
)
|
(6
|
)
|
(61
|
)
| |||||
Net current
period charges(1) |
(23 |
) |
(5 |
) |
(28 |
) | |||||
Charges against reserve and
currency |
(159
|
)
|
(10
|
)
|
(169
|
)
| |||||
Balance September 30,
2011 |
$ |
116 |
$ |
10 |
$ |
126 |
|||||
_____________________________
(1) |
Represents net amount recognized within the Condensed Consolidated Statements of Income for the period
shown. |
Reconciliation to the Condensed Consolidated Statements of Cash
Flows:
Three Months
Ended September 30, |
Nine Months
Ended September 30, | ||||||||||||||
2011
|
2010
|
2011
|
2010
| ||||||||||||
Charges against
reserve |
$ |
(49 |
) |
$ |
(70 |
) |
$ |
(169 |
) |
$ |
(153 |
) |
|||
Asset impairment |
— |
1 |
— |
5 |
|||||||||||
Effects of foreign currency
and other non-cash items |
7
|
15
|
7
|
—
|
|||||||||||
Cash Payments for
Restructurings |
$ |
(42 |
) |
$ |
(54 |
) |
$ |
(162 |
) |
$ |
(148 |
) | |||
The following table summarizes the
total amount of costs incurred in connection with these restructuring programs by
segment:
Three Months Ended September
30, |
Nine Months
Ended September 30, | ||||||||||||||
2011
|
2010
|
2011
|
2010
| ||||||||||||
Technology |
$ |
(4 |
) |
$ |
2 |
$ |
(23 |
) |
$ |
138 |
|||||
Services |
(2 |
) |
2 |
(2 |
) |
47 |
|||||||||
Other |
2
|
—
|
(3
|
)
|
25
|
||||||||||
Total Net Restructuring
Charges |
$ |
(4 |
) |
$ |
4 |
$ |
(28 |
) |
$ |
210 |
|||||
We have identified and approved additional restructuring initiatives
of approximately $30 for the fourth quarter of
2011.
Note 9 –
Debt
Xerox Capital Trust
I
In May 2011, Xerox Capital Trust I (“Trust I”), our wholly owned subsidiary, redeemed its 8% Preferred Securities due in 2027 of $650 with funds received from the settlement of our liability to Trust I. The settlement and redemption resulted in a
pre-tax loss on extinguishment of debt of $33 ($20 after-tax), representing the call premium of approximately $10 and the write-off of unamortized debt costs and other liability carrying value adjustments of approximately
$23.
Senior Notes
In May 2011, we issued $300 of Floating Rate Senior Notes due 2014 (the “2014 Floating Rate Notes”) and $700 of 4.50% Senior Notes due 2021 (the “2021 Senior Notes”). The 2014 Floating Rate Notes were issued at par and the 2021 Senior Notes were issued at 99.246% of par, resulting in aggregate net proceeds for both notes of approximately $995. The 2014 Floating Rate Notes accrue interest at a rate per annum, reset quarterly, equal to the three-month
LIBOR plus 0.820% and are payable quarterly. The 2021 Senior Notes accrued interest at a rate of 4.50% per annum and are payable semi-annually. As a result of the discount, they have a weighted average
effective interest rate of 4.595%. Proceeds from the offering were used to redeem the $650 Trust I 8% Preferred Securities mentioned above and for general corporate
purposes.
Credit Facility
In the second quarter 2011, two
lenders to our Credit Facility agreed to extend the maturity date of their portion of the Facility, such that the entire Credit Facility now has a maturity date of April 30, 2013. Prior to this amendment, 10% of the Credit Facility had a
maturity date of April 30, 2012.
Xerox 2011 Form
10-Q
16
Note 10
– Interest Expense and Income
Interest expense and interest income were as
follows:
Three Months
Ended September 30, |
Nine Months
Ended September 30, | ||||||||||||||
2011
|
2010
|
2011
|
2010
| ||||||||||||
Interest expense(1) |
$ |
116 |
$ |
148 |
$ |
367 |
$ |
454 |
|||||||
Interest income(2) |
161 |
165 |
498 |
511 |
|||||||||||
_____________________________
(1) |
Includes Equipment financing interest, as well as non-financing interest expense that is included in Other
expenses, net in the Condensed Consolidated Statements of Income. |
(2) |
Includes Finance income, as well as other interest income that is included in Other expenses, net in the
Condensed Consolidated Statements of Income. |
Note 11 – Financial Instruments
Interest Rate Risk Management
We use interest rate
swap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value
hedges or cash flow hedges depending on the nature of the risk
being hedged.
Fair Value
Hedges
At September 30, 2011, we did not have any interest rate swaps. At December 31, 2010, pay variable/receive fixed interest rate swaps, with notional amounts of $950 and net asset fair values of $11, were designated and
accounted for as fair value hedges. The swaps were structured to hedge the fair value of related debt by converting them from fixed rate instruments to variable rate instruments. No ineffective portion was recorded to earnings during 2011 or
2010.
Terminated
Swaps
During the nine months ended September 30, 2011, we early terminated several
interest rate swaps that had been designated as fair value hedges of certain debt instruments. The net proceeds from these terminated swaps were $27 and are classified in cash flows from operations in the Condensed Consolidated Statements of Cash Flows. These terminated interest rate swaps had an aggregate notional value of $2,150. The $27 fair value credit adjustment to debt is being amortized to interest expense over the remaining term of the related notes.
Foreign Exchange Risk Management
We are a global
company that is exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchase option
contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:
• |
Foreign currency-denominated assets and liabilities |
• |
Forecasted purchases and sales in foreign
currency |
Summary of Foreign Exchange Hedging
Positions
At September 30,
2011, we had outstanding forward exchange and purchased option contracts with gross notional values of
$3,777, which is reflective of the amounts that are normally outstanding at any point during the year.
These contracts generally mature in 12 months or less.
The following is a summary of the primary hedging positions and corresponding fair values as of September 30,
2011:
Xerox 2011 Form
10-Q
17
Currency Hedged (Buy/Sell)
|
Gross
Notional Value |
Fair
Value Asset (Liability)(1) | |||||
Euro/U.K. Pound
Sterling |
$ |
782 |
$ |
(5 |
) |
||
U.S. Dollar/Euro |
589 |
20 |
|||||
Japanese Yen/U.S.
Dollar |
501 |
13 |
|||||
Japanese Yen/Euro |
347 |
21 |
|||||
Swiss
Franc/Euro |
236 |
(4 |
) | ||||
U.K. Pound Sterling/U.S. Dollar |
218 |
(5 |
) | ||||
U.K. Pound
Sterling/Euro |
161 |
— |
|||||
Canadian Dollar/Euro |
146 |
(1 |
) | ||||
Swedish
Krona/Euro |
96 |
(1 |
) | ||||
U.K. Pound Sterling/Swiss Franc |
76 |
— |
|||||
Euro/U.S.
Dollar |
75 |
— |
|||||
Mexican Peso/U.S. Dollar |
68 |
(6 |
) | ||||
Indian Rupee/U.S.
Dollar |
66 |
||||||